The easing of insolvency laws should encourage enterprise

Australians are often urged to be more entrepreneurial, but the enduring social stigma and severe legal penalties surrounding insolvency have deterred many people from ‘giving it a go’. If we want people to take risks in the pursuit of success, then we must become more tolerant of failure and strike a better balance between encouraging entrepreneurship and protecting creditors.

The Federal Government therefore proposed changes to its insolvency laws as part of its National Innovation and Science Agenda back in December 2015. The suggested reforms included a proposal to reduce the minimum bankruptcy period from three years to one year, with the aim of encouraging innovation and risk taking by reducing the social, legal and financial consequences associated with bankruptcy.

Other reforms proposed as part of NISA include a proposed safe harbour to protect directors from insolvent trading liability and a stay on the enforcement of ipso facto clauses while a company is under voluntary administration. These three reforms were separate to those contained in the Insolvency Law Reform Act passed in 2016.

The Government received 72 submissions in response to a proposals paper on these proposed reforms. Multiple submissions questioned the effectiveness of reducing the minimum bankruptcy period, including the submission from the Australian Restructuring, Insolvency & Turnaround Association which expressed ‘mixed views’ about whether this measure would be effective.

Almost two years later, in October this year, the Bankruptcy Amendment (Enterprise Incentives) Bill was finally introduced into the Senate to amend the 50 year old Bankruptcy Act. As promised two years ago, it proposes to reduce the period of bankruptcy from three years to one year and relax a number of other historic restrictions around people who declare bankruptcy.

These changes should allow people who are swamped with debt to suffer less if they file for bankruptcy. The proposed changes may encourage more people to declare bankruptcy rather than try to struggle through their current financial difficulties – especially if they have minimal assets. This may equate to less people trying to enter into Debt Agreements to settle their debts over a longer period.

Australia sadly has a history of punishing financial failure and so this bill is a nice cultural shift in thinking. As Malcolm Turnbull said 2 years ago, when this reduction in time served as a bankrupt was first suggested, it’s often the nation’s small business owners and entrepreneurs who are forced to file for bankruptcy. If we truly want a more dynamic and ambitious Australia, risk takers shouldn’t be aced out of the game for 3 years for having a go.

The key features of the Bill are as follows:

The bankruptcy period will reduced from 3 years to 1 – The time a bankrupt will remain bankrupt will be reduced from 3 years to 1 year, with the bankrupt being discharged a year after the date on which the bankrupt filed his or her statement of affairs.

Bankrupts can apply for credit after a year – After the 1 year period has ended the discharged bankrupt will no longer be required to disclose his or her status as a bankrupt when applying for credit.

Bankrupts will no longer have to apply for permission to travel overseas – After serving just one year of bankruptcy, people will no longer be required to ask permission to travel overseas once they have been discharged.

Company Directorship – After the year long period of bankruptcy has been served, people will be permitted to serve as or be appointed as a company director and or the trustee of a trust.

Income – This one is interesting, income contribution obligations of discharged bankrupts will continue for two years after they are released from bankruptcy, in effect retaining the current situation, as bankrupts are required to make income contributions for 3 years. If people do not comply with these conditions, they can remain bankrupt for up to five to eight years.

Current Bankrupts – Its looks like individuals who are currently bankrupt will not be affected by these changes as they are not retrospective. Ongoing bankruptcies which have been extended for 5 to 8 years due to an objection to discharge will remain unchanged.

When will this happen? If the Amendments to the 1966 Bankruptcy Act are passed by the Senate, the new rules will come into force 6 months after the Bill receives Royal Assent, and so change still lies some distance in the future. The delay is designed to give trustees time to prepare any objections to discharge, and will enable relevant agencies time to consider whether a one-year licensing or professional restriction is appropriate for their purposes.

Given the knife-edge nature of Australian politics at the moment, and the current confusion over citizenship eligibility, nothing can be taken for granted, but Australia must grasp the nettle of reform at some stage.

Rather than bemoan our failure to be as entrepreneurial as the Americans, for example, we must take on board their acceptance of failure as well as celebration of success. Culture can be shaped by law, just as law is shaped by culture, and reducing the barriers faced by failed business owners to learn from their mistakes and give it another go can only help the economy prosper in the long term.